Asset Protection for Real Estate Investors

103 Replies

Hello BP members and investors. I am an Asset Protection Attorney specifically for Real Estate Investors. I see lots of questions on this topic about how to structure your companies and protect your investments, but not a specific forum entitled Asset Protection, which is what we are all talking about. 

Asset Protection works by taking away the economic incentive for somebody and their attorney to sue you. The reality is that investors will face a lawsuit in their lifetime: it’s not a matter of IF but WHEN am I going to get sued?

A properly established plan performs three primary functions: lawsuit deterrence, settlement negotiation leverage and/or placing your assets out of the reach of a legal opponent.

You do this by:
- Insurance
- Using LLC's
- Combining them with Trusts
- Owning NOTHING personally in your name (the Rich own nothing, but control everything).
- Use separate legal tools

The main ways clients use their planning are:
1. Reducing Fear
2. Deter Lawsuits
3. To focus their Financial & Estate Planning
4. To re-focus their efforts on their money making activity.

I invite everybody from BP newbies trying to get started, to your richest investor to chime in and ask any questions, and offer up their own experiences and protection plans. We are all in the investment game together, and will all face the same problems as we grow our assets and legacies. Asset Protection is NOT a one size fits all strategy, but is specific for each person per their current assets, worth, goals, and what they invest in. 

Interestingly enough I've never known anyone who has actually been sued in 40 years of operation. A few idle threats but nothing more.

@Christopher Smith that is very strange that you cannot think of a single real estate owner/investor to be sued in 40 years. Real Estate Investing in the most heavily litigated area of law that exists. It reaches into so many other areas of law and life the types of lawsuit complaints are endless. Being a landlord comes with lots of liability, along with owning investment properties. Good job on you for being so lucky. Hopefully you still are set up to protect you, and your assets and legacy you will pass down if you ever are. 

@Chris T. thanks for contributing. Real estate investing is not all unicorns and rainbows. There are many potential downsides – dealing with vacancies, problematic tenants, maintenance expenses, and the proverbial call in the middle of the night to fix an overflowing toilet. Plus negligence injuries etc.

In my opinion, the single biggest risk of real estate is opening yourself up to potential liability. If somebody is injured (or worse) on your property due to negligence you could be held personally liable. All of your assets could be at risk. The tenant can sue you and, if the judgment is large enough, come after your house, car, and any other assets or investments you have.

Your fist level of protection should be your insurance. BUT, the insurance industry would not be in business if they paid all claims. They stay in business by charging premiums and not paying claims, or challenging them and not paying them in full. Otherwise there would be no insurance companies since they would not afford to be in business. So you cannot count solely on insurance to protect you. Next, I would require all my tenants to have their own insurance.

Third, will start addressing your question of umbrella coverage. You will need additional protection. This will be through, LLC's, Trusts, and possibly an umbrella coverage if desired. The idea is to simply not own anything in your name, but control everything, and making it very difficult to collect a judgment. The Rich own nothing, but control everything. That's how LLC's and Trusts work. It just a matter of finding which fits your current situation and future growth.

Without knowing your network and assets etc I could not tell you what amount of coverage you would need. And that’s more for an Insurance Broker. It would depend on what assets and incomes you want to protect and the type of investments and what your current structure of protection is like. Condos and duplexes tend to invite more litigation. The umbrella coverage would provide you additional protection from what your primary insurance provider won’t cover. But they will also fight the claims and have small print on them. Insurance does not stay in business by paying out claims.

But the idea of asset protection is to not pay out and not let plaintiff’s be able to exercise a judgment against you. I always recommend to my clients and prospects to get an insurance coverage that is as extensive as possible. But as you know, insurance policies have a lot of small print.
From an asset protection perspective, it is important to note that an LLC is a very efficient legal tool to hold and manage investment real estate and to isolate the risk it generates. However, it will not protect your personal assets from (frivolous/bogus) lawsuits. A plaintiff may always attempt to pierce the corporate veil by holding you personally responsible by theories as negligence or gross negligence.

I would say consider setting up an LLC. If the total equity you your properties is not higher than 250k you may want to the properties in the same LLC. However, if there were a liability issue with one of the rentals, (the equity you have in) both properties would be exposed. That's a big problem.
Your decision on how to proceed will depend on value of your investment real estate, the revenue it will generate and the value of your other personal assets (bank and brokerage accounts, your primary residence, other investments, etc.) .
Depending on the value of you rentals and the revenue they generate + your personal assets (bank and brokerage accounts, primary residence, other investments, etc.), you may want to consider combining (your stake in) the

LLC's with a legal tool that is specifically designed for asset protection purposes for example a Family Limited Partnership filed in a state with strong charging order rules such as AZ.

I recommend you to schedule a consultation with an insurance broker and an asset protection attorney for real estate investors that has proven expertise in the area of asset protection planning. Don’t go into to much detail of your personal assets and worth, etc on any public forum as you have no attorney client privilege protection and can deem to have waived it. 

@Brian Bradley Hey Brian, I would be interested in connecting with you to discuss your different insurance partnership and see if there’s any way I could be of value to you and your clients as an insurance broker in all 50 states. Would you be interested in connecting on the phone sometime? -Matt

@Christopher Smith  Real estate investing is not all unicorns and rainbows. There are many potential downsides – dealing with vacancies, problematic tenants, maintenance expenses, and the proverbial call in the middle of the night to fix an overflowing toilet. Plus the worst, negligence injuries etc which lead to court, litigation and judgments. 

The idea of asset protection planning, is the same deal as what everybody is talking a bout regarding what business structures to use, should I get insurance, how much coverage, what type of entity etc. This is called asset protection, and the point of asset protection is to protect you for the day you need it. Plan for the bad, to preserve your investments and legacy.

The fact that you have not been sued and can’t think of anyone who ever has does not mean that it can’t or won’t happen and to you. Asset protection has become one of the hottest areas of law over the last 15 years for a reason. An insane increase in lawsuits by individuals looking to target high asset individuals (investors) and extract assets from them by lawsuits. To fight this you use legal tools, strategies and methods.

In the past, up until the 80s their was not a large need for a legal practice like AP, but that was because the legal system was different then. Attorney’s were not allowed to accept contingent fees, attorney’s were prohibited from advertising, attorney’s were prohibited from pursuing and filing frivolous lawsuits, and lawsuits were limited by strict rules of Civil Procedures. Not so any more. In 64, Main was the last state to allow attorney’s to accept contingency fees, 77 in Bates vs State Bar of AZ the door was opened to attorney advertising, in 83 the ABA changed its ethic rules changing the standard for ‘frivolous’ lawsuits, and from 80-00 the Civil Procedure rules which limited the capacity to bring lawsuits without clear and stated causes were transformed to allow cases that would have been tossed out of court to go forward.

Business owners, investors, employers and entrepreneurs are targets now, and if you are unprotected, you can loose everything you built and worked for. You do this by creating a barrier between your assets and someone who is dead set on getting them.

This is a great article written by Douglass Lodmell of Lodmell & Lodmell about who needs Asset Protection.

Great idea to set up an updated forum for this topic. The rules and recommendations for this seem to be evolving on a pretty frequent basis. A year ago I'd never heard of a Delaware Statutory Trust or a Series LLC, and now I've been told that they're the "only way to go" on no less than four different podcasts within the past month.

One topic I think would be interesting to address is showing data demonstrating the average insurance coverage limits based on home value. When I converted my SFH from primary residence to rental, the process was surprisingly "turnkey" from what I recall. I'd relate it to purchasing auto insurance, where you're given kind of the default average coverage limits, then you just adjust up/down as desired (mostly guessing on what you should choose). Now that I'm more cognizant of the importance of asset protection, I wish my provider would do a more comprehensive job of explaining the importance of the various components of insurance. I think presenting summary data on what the national average is for the different types of coverage would be a good place to start.

@Matt Moylan I am sure can chime in on the data average for insurance coverage limits. He is in the insurance business. 

@Keith Meyer I did not want to just update the topic, but consolidate some of it. It is scattered all over the site. Their are lots of different corporate structures, insurance amounts, additional umbrella insurance, different trusts to use. Lots of tools in the tool box, that work specifically per each persons needs, level or risk, investments, current level, future goals, net-worth, etc. So much goes into the asset protection plan, that just saying I have a estate trust or an LCC is not enough. And how they all work together has to be set up properly or its all for nothing. 

@Chris T. — it all depends on the asset portfolio you have along with your net worth. I would be happy to connect with you on the phone to learn more of your situation and the amount I would recommend for you.
@Keith Meyer — When looking at insurance premiums, unfortunately, it differs not only by state, but down to individual zip codes. On top of that, many companies are moving to using credit as a rating feature in their alga-rhythms. If you are one certain area, and only in that area, it becomes a little easier to predict what the premium will be. To give a couple examples: a $200k house in the Midwest annual premium may be $1,200 a year and that same size house in the west might cost only a couple hundred dollars. I would be more than happy to help review anyone’s coverage to ensure their coverage is not only correctly protecting the asset/liability needs, but the premium is also competitive across the industry. My brokerage is licensed in all 50 states and we are able to shop all insurance coverage across multiple brokers. Having an insurance broker who is not only knowledgeable in the industry, but is willing to take the time to explain what coverage is provided, is what you want (especially when investing). Many brokers do not take the time to explain the coverage, they just give you what they think is right. My brokerage takes a comprehensive approach to explaining your policies and making sure you understand what you’re covered for/not covered for. If you, or anyone is interested in reviewing coverage with me, feel free to send me a direct message and I will send you my contact information. Thanks! MM

If you are going to pick and hire an asset protection lawyer, do your homework and ask questions. There has been an explosion of asset protection due to the large explosion of litigation, but not all lawyers actually practice assist protection. Ask the questions in the attached article to get to an experienced asset protection attorney, not just an attorney who has taken a few CLE courses and is dipping his toes in this complex field. You are not going to have a general surgeon perform brain surgery, or a dentist as your family doctor.

My view is that you should first ask yourself some questions before seeking professional help for asset protection.

1.    What is your tolerance for risk? Younger folks in the process of building their portfolio are likely to accept a higher level of risk than older folks with more established estates. Some folks are fearful by nature and sleep better knowing they have done everything they can to protect themselves, even though there is a significant cost. If so, you should accept and be comfortable that you are paying in large part because of your fear.

2.    What kind of risk are you creating based on the nature of your real estate activities? Are you a mom and pop landlord whose most likely risk is a premises liability claim likely covered by insurance or a small claims suit for return of a security deposit? Or are you a slumlord creating hazardous conditions at your property and racially discriminating against your tenants? If you are a flipper are you hiring qualified licensed/knowledgeable team members who know what they are doing or are you doing shoddy work without permits and not telling your buyers. Only by understanding the risk inherent in your activities are you then able to engage in an objective cost/benefit analysis for paying for asset protection.

3. How well do you manage risk? Do you have partners, investors, employees, significant others, tenants, borrowers, lenders, etc. where resentment tends to build in your relationships or are you on top of communications and fair in your dealings? Do you read the contracts you sign or do you just click away without reading when you get sent a document via docusign? Are you good at due diligence and do you understand what you are doing as a real estate investor? Understand and assess who is most likely to make a claim against you and why. Then you can get some context for an asset protection plan that might fit you. Try not to get caught up in fear based sales pitches.

4. Do you already have in place an estate, financial or tax plan? IMHO asset protection planning is best implemented as an adjunct to a larger estate, financial or tax plan, not as a substitute.

I completely disagree with @Rob K. if you like risk and are willing to risk loosing your investment, hard work and legacy, sure don't care about AP and not think about safeguarding it. sounds like a wonderful and well thought-out investment strategy. 

You just made a huge investment. 100's of thousands of dollars. I hope to God you thought about your investment strategy and structure before you decided to say hey I love risk and lets just swing for the fences. 

Now ask your self how much do you like risk? This is not investing in stocks and bonds and speculative moves. Before you purchase investment properties in Real Estate you have already built a team, and thought about corporate structures and what do to. Not, hey lets gamble since I love risk with 100k or more, and lets put my personal house, and car etc on line. How well do you manage risk? Seriously? 

In, more importantly, a GENERAL ESTATE PLAN IS NOT going to do anything for you to protect your assets since it is just an estate plan, not a asset protection plan. Completely different. A living trust will not stop a creditor or a judgment against you. Sorry. That just the law, and well documented, All the living trust will do is say who gets what when you die and help you by-pass taxes. NOT protect your assets when needed. Specific asset protection clauses need to be added to any trust, which must be discussed before hand, otherwise if done after its a fraudulent transfer. So you must think of your structure and trust and LLC's BEFORE hand, and jurisdictions.

Just for large estates? Sorry, VERY wrong again. the most sought after individual's for lawsuits. the sweet spot are your average investors (neighborhood millionaire) {contractor, lawyer, doctor, nurse, etc) who just turned the corners with assets, of 1 million to 3 million who now has tons to loose from just the threat of a lawsuit let alone an actual judgment. How would a negligent tort injury 100k-500k judgment against you effect your investments now? That means, your personal home, and 2-3 investment properties. So not very large at all. But lets welcome risk? 

What is needed is staged protection combining multiple layers, and its not very expensive. LLC's combined with insurance, and Trusts and once you have about 1 million in assets a bridge trust. Estate plans do not set up your LLC's. And different LLC's are better for REI's and asset protection then other forms, as are different estate plan trusts.

PLEASE talk to actual attorney's and asset protection attorney's for any advise on what you need, along with your CPA. Otherwise you are just risking your investment and gamboling. 

I was updating my website and thought this would benefit everybody. 

What’s your WHY?

This concept is so dynamic even for real estate investors. 

Where do you start? The starting point of anything you do in life or business is starting with "why." Why do we do what we do? Why are we doing this? Why am I starting this business? You do not invest in real estate for profit; you do not start a business for profit. Profit is just the result. WHY you do this, why do you or your business exist? Thats the starting point. 

For example, as an investor, I invest in real estate not for the profit, but because I want to generate enough passive income to spend time with my daughters, so that my wife does not need to work 12 hour night shifts, and to leave a legacy for my girls and my future grandchildren. The profit is just the result of my driving why.

My "why" for my Asset Protection Law Firm is because I strong believe that you deserve to keep what you earned and built. I believe that you should sleep well at night knowing you’re hard work and efforts are protected. My purpose is to reduce the fear associated with an out-of-control legal system set up on extracting assets through Legal Extortion Rackets by protecting your wealth from such attacks, while leaving you with both control and beneficial use of your assets.

The way I do this is by using the most state of the art and tested legal tools, strategies and methods that are simple to use, legal and that have been tested for over 20 years. These tools include the strategic use of domestic charging order protection (COP) entities in select jurisdictions as well as the revolutionary Bridge Trust ®.

Affiliating with Asset Protection Counsel - We just happen to be the best at it.

By establishing my personal and professional WHY I have created an overall structure that is easy for me to follow and analyzing what I am doing and how it fits into my Why. Check out Simon Sinek’s video.

The same principle goes with Robert Kiyosak’s books. You must alter and change your mindset to actually see. You must change you and make profound decisions to be can investor. This starts with establishing your Why and deciding which side of the cash flow quadrant you want to be one, the left side as a employee or self employed individual still in the rat race, or the right side as an investor and business owner with systemic passive cash flow. How does this tie into Asset Protection? Once you open your eyes and try to move from the left to the right side of the quadrant, you then want to protect what you have. 

For those following this thread, this article does a good job of explaining the differences in protection provided by LLC versus Umbrella insurance, with specific scenarios included.

@Keith Meyer good article on umbrella policies. Just remember, get insured as much as possible, and if not more. But, also remember that insurance companies are a business, and do not be confused with what you are 'covered' for and what the fine print says and what they will end up paying out in real life. Don't get false security of thinking your insurance and umbrella insurance will save you vs judgments. They won't. READ your policy and ALL the fine print and ask what you are covered for when it comes to judgments and law suits, negligence, etc. You will be very surprised what is NOT covered. Hence, getting more distance and protection in addition to your insurance. Insurance companies are not in business by paying claims. They make money and stay in business by taking your payments, and not paying out claims. I have litigated so many cases where insurance providers refused to pay claims. 

What about ERISA accounts for asset protection?

Would a SD401K, SDIRA, or SDHSA work as an asset protection vehicle?

I read where a court held inherited IRAs are not protected from creditors. I also read when a retirement account becomes too large (for example, greater than a million [in some states]), it starts to lose its protection from creditors. I'm not an attorney; I just read personal finance articles in my spare time.

Retirement accounts are not protected

Asset protection is also more than just having s business setup a certain way. You cannot commingle funds is one major way people lose all protection and there are others. My suggestion is get a CPA attorney to review your assets and tax returns to determine the best type of business to setup 

@Brian Bradley Some excellent thoughts around asset protection.  And I believe your comments on the “neighborhood millionaire” type with anywhere from 2-10 investment properties is likely to apply to many who may lurk on BP.  Two questions for you:

1) What kinds and size of judgements are you typically seeing against property owners? What I’m trying to understand is the complaints many plaintiffs are bringing, outside of a truly negligent behavior by a property owner.  

2) Are you seeing LLC pierced by plaintiffs against property owners with mortgages in their personal names , but with the properties themselves in LLCs? This is a strategy I would like to implement on all my properties (I have some of my properties in an LLC, but not all), but I'm concerned with the underlying loan being unassociated with the LLC directly and opening things up to commingling accusations.


@Jade S.  Jurisdiction will have a HUGE say. Just a basic negligence lawsuits can see judgments in the 40k-500k. This would kill the typical BP investor. And we see the need for AP to be that new "neighborhood millionaire" since people with assets above $2.5 millions have tended to have structured an AP Plan by that point. 

I just saw a judgment for 350k for a basic landlord negligence case where a tenant was injured. Judgments can very from state to state, even city to city and county to county, and injury type. Some states have caps, others do not. Jurisdiction is powerful. The laws and rules that govern will change from state to state, state to federal, country to country. Heck, you can live in Delaware or Nevada, have a LLC in those states, then like most investors have a investment property in lets say California where you are sued, and the courts will not care what type of LLC you are or where you are incorporated, or the state you live in. Neither will the Full Faith and Credit Clause of the Constitution when they try to enforce the CA court judgment. You could be driving your car, owned by your LLC, get in a car accident, horribly injure somebody, then hire somebody like me to show that you made a substantial deviation while driving from the scope of your employment, hence personally liable. The scenarios are endless. Series LLC's won't protect you in states that don't recognize them like CA, and federal courts where they have not been challenged.

The last thing you want is to have anything in your personal name. You want it in your LLC and Trust. And somebody is going to have to personally guarantee your loan LLC or not. Especially if your LLC is new and young with no history. Commercial loans are different. So, you are still personally liable, and would be named in a complaint when I see you are the owner and have assets to come after. Plus naming you personally keeps me out of federal court.

The corporate veil is very easy to pierce. Hence the need for additional protection then just an LLC. Theoretically yea the entity is deemed separate, and the courts will hold it separate unless shown you did something wrong or not. But how many people actually run a tight perfect ship in compliance with every single law, rule and regulation? Who has perfect accounting books and have not commingled a single dollar or forgot a reimbursement? Then what if you personally guarantee a loan or someone is injured by your carelessness/negligence while operating your LLC? What if you failed to follow your LLC formalities or underfunded your LLC? Etc Etc Etc. You are dealing with unity of interest, fraud, or the catch all injustice that a judge rectifies. Public Policy and judicial bias are very real and scary.

Distinction between Legal Authority and Practical Authority need to be understood also. The problem comes when a judge without the legal authority to do those things, nevertheless chooses to exercise his practical authority power and do them anyway. This could be done in direct contravention of establish statutes and case law, or it could be done with some ‘rationale' like saying that your LP or LLC is invalid, or is considered your ‘alter-ego'. In any case, the result is that the practical authority of the court is used to take assets with a questionable (or no) legal authority.

The solution is to remove or vastly hinder a judge’s practical authority over your assets, so that he cannot usurp the legal process and if forced to rely on legal authority. However, when it comes to domestically local real estate we have a particular challenge. We cannot just move the real estate. We can properly structure the legal protections, but in order to still protect against a misuse of judicial ‘practical authority’ we need to do more.

What you really want is an Asset Management Limited Partnership acting as a (COP) which owns the LLC in any State, which in turn owns a piece of property. The only remedy would be a charging order only against the partnership interest.

Check out video 6 and 7 on my site, which explain jurisdiction.